Starting a business is not something you decide overnight. A lot of preparation, planning, and testing goes before launch. Naturally, some business expenses occur before registering as a freelancer/company with the tax office.
Don't get upset. The tax officials recognize these expenses so that they can be claimed on your tax. Here's how it works.
Tax deductions on formation costs
The costs of preparing to start a business are often called formation costs. Still, you can meet terms like launch costs, set-up expenses, or start-up costs.
The costs of setting up a business include expenses that you have to pay once before setting up a business. These can be professional market analysis, consulting, and start-up coaching costs. They also include business registration and permits. The amount of the expenses depends, among other things, on the business's legal form. For example, the founding costs of a GmbH are higher than those of a sole proprietorship since there are expenses for legal advice, corporate tax, and entry into the commercial register.
Before diving into the process, make sure you have all the necessary documents to support your claim, like invoices and receipts.
Generally speaking, you can claim two types of upfront costs on tax: intangible and tangible. Here is a list of potential deductibles that the official German Ministry of Economic Affairs approved/explained (in German).
Deductions for intangible costs
In some cases, founders have to gain extra skills or need external help to start their businesses. These expenses are considered intangible costs and include
Seminars for founders,
Buying relevant literature,
Costs for individual coaching,
Costs for the creation of a business plan,
Driving costs to your business,
Expenses for consultants (e.g., accountant or lawyer)
Costs for your phone, postage, printing, or copying.
You should also remember the expenses related to registering your business, as depending on the legal nature of your business, you might have to pay a fee for the registration or even involve a solicitor.
Deductions for tangible costs
The second type of deductible expenses is tangible costs, referring to any equipment you need to start your business. This can be office furniture, laptops, cameras, or products and gadgets required to start production. You must collect the receipts to claim these expenses as proof of your costs. Therefore, keeping and organizing your receipts is a crucial part of your accounting.
Declare the Expenses
Once your business registration is complete, you can include the formation costs in your tax declaration. List each expense item separately, providing a clear description and the corresponding date.
After submitting your tax declaration, the tax office will review your claim. If everything is in order, they will process your request and provide any applicable deductions.
You can deduct the expenses in the year in which the expenses were incurred. The start-up costs can be deducted retrospectively over up to three years. The costs are deemed operating expenses if there is a recognizable economic connection with the foundation. Therefore, keep all receipts for your expenses.
One exemption is registering your business after being unemployed. While you didn't have any positive income during this time, it might be worth claiming the upfront cost of your self-employed career on tax, as you can claim a so-called loss carryback in the Anlage sonstiges in your annual tax declaration. In this case, your deficit from the upfront business costs will be offset by the positive income from the following year. Alternatively, the tax office might issue an additional tax assessment for the deficits from your upfront business expenses.
Receipts, receipts, receipts
The path to starting a business is often lined with many upfront costs before making any money. Luckily, you can claim these expenses for tax deductions. All you have to do is collect your receipts and organize your accounting to quickly and easily use them for your tax declaration.